My view of the world is driven by multiple narratives. Why would someone bid up the price of bonds and not bid down the price of stocks? Prices are set by the people who trade, and so we can get contradictions in the data.
Near-record low or even negative bond yields have something to do with the fear of other investments. It also has to do with the secular stagnation narrative or recession narratives.
Which narratives are popular today?
There’s this secular stagnation narrative, or a Japan-now-expanding-to-the-world narrative, which sounds superficially plausible. Almost no one forecast that the current low interest-rate regime would still be around in 2019, so ask me again in 10 years and I might have a forecasting model.
What could make volatility rise again?
It could be a return of a narrative that inspires fear, as happened in 2008. Volatility shot way up. There was a return of the Great Depression narrative. In September 2008, we had the Lehman bankruptcy and the WaMu takeover and talk then shifted to, is this 1929 again?
It brought back fearful stories, but right now those stories aren’t so prominent. People aren’t so worried about the stock market. They’re interested in other things, like Donald Trump or Boris Johnson.
Will the next U.S. recession be major or mild?
The natural answer is that it won’t be as bad as the 2008 one. Because that was like the worst recession! The question is what would make it bad. It would be some kind of scary narrative that comes back with new force, like a Great Depression narrative, or even the 2008 narrative coming back.
In the U.S., confidence has held up pretty well. It hasn’t been growing rapidly, but it’s still up there so people are not scared. And that means that many people are just not paying attention to their stock portfolio.